Sterling Bancorp (NYSE:STL)
Q4 2015 Earnings Conference Call
January 28, 2016, 10:30 ET
Jack Kopnisky - President & CEO
Luis Massiani - EVP & CFO
Casey Haire - Jefferies
David Darst - Guggenheim Securities
Matt Kelley - Piper Jaffray
Collyn Gilbert - KBW
Welcome to the Sterling Bancorp Q4 2015 Conference Call. Let me turn the call over to Jack Kopnisky, Chief Executive Officer.
Good morning, everyone and thanks for joining us to present and discuss our results for the fourth quarter and year-end 2015. Joining me on the call is Luis Massiani, our Chief Financial Officer.
We finished 2015 with strong financial results and are well positioned strategically for the future. As we have discussed on prior calls, we have been focused on building a high-performing sustainable Company that provides strong returns to our shareholders, great service and value to our clients in a high-energy results oriented environment for our employees. For the quarter, core earnings were $33.5 million and core diluted earnings per share were $0.26. This represents earnings growth of 71% and EPS growth of 13% over the same period a year ago.
On a linked quarter basis, earnings increased 4.7%. For the year ending December 31, 2014, core earnings were $105.4 million and core diluted earnings per share were $0.96. This represents earnings growth of 58% and EPS growth of 21.5% compared to 2014.
Our financial metrics for the quarter were strong. Return on average tangible assets was 122 basis points and core return on average tangible common equity was 14.6%. Core efficiency ratio continued to improve to 47.6%. Revenue increased by 2% and expenses declined 1% to create continued positive operating leverage. Capital ratios and credit metrics continued to be solid. We had strong commercial loan growth in the quarter of $334 million or 20.4% on an annualized basis. We leveraged the core deposit base to fund this growth moving the loan to deposit ratio to 92%. Core average deposits grew approximately 5% in the quarter and we will continue to accelerate core deposit growth to fund our asset generation objectives.
The Hudson Valley acquisition has now essentially been fully integrated. We're well ahead of our plan and are seeing meaningful results from the acquisition both on improved productivity and increased efficiencies. We have consolidated eight financial centers since the completion of the merger and we'll consolidate additional locations in 2016.
Finally, we added four new commercial teams in the quarter focused on specific client segments including healthcare, loan syndications, community development and real estate cash management. We also added incremental professionals to existing teams to enhance productivity. We now have 30 commercial banking teams that are measured on economic value and are focused on providing exceptional expertise to targeted client segments.
Now let me turn the call to Luis to detail the financials.
Thank you, Jack and good morning. Turning to slide four, let's review and compare key balance sheet and income statement metrics for the linked quarter and the same quarter a year ago. Performance for the quarter was strong. As of December 31, 2015, our total assets were $12 billion which represents a growth of $4.5 billion over the past 12 months and includes $3.5 billion in total assets acquired from Hudson Valley.
At December 31, our total loans increased to $7.9 billion; our total deposits were $8.7 billion; and our core deposits were $7.8 billion. We continue to invest in hiring new teams and expanding our loan origination and deposit gathering platforms. We anticipate we will continue to generate significant growth in loans and deposits going forward. Net interest income for the quarter was $95 million, increasing $35 million over the same period a year ago and $2 million over the linked quarter. We have deployed the excess liquidity that we acquired in the Hudson Valley merger. As of December 31, our total loan to deposit ratio was 92% and our securities comprised 22% of total assets.
On the bottom of the page, we detail our key performance metrics which show continued strong operating momentum. Net interest margin was 3.7% which represented a 2 basis point decline from a year ago. Included in interest income was $7 million of the accretion of the credit mark on prior acquisitions which compares to $5.8 million in the linked quarter and $1.2 million in the same quarter a year ago. Excluding the impact of accretion, net interest margin was 241 basis points in the fourth quarter compared to 253 basis points in the linked quarter.
NIM performance in this quarter was impacted by low repayment activity and lower collection volumes on loans that had been previously charged off by legacy Sterling and Hudson Valley. Assuming no additional interest-rate increases during the year, we anticipate that full-year 2016 net interest margin would be approximately 360 basis points. Our core operating ratio continued to improve year-over-year. Core return on average tangible assets was 1.2% and core return on average tangible equity was 14.6%. And we achieved a core efficiency ratio of 47.6%. We're continuing to make steady progress towards achieving our long term performance goals.
Turning to slide five, let's review the reconciliation of GAAP to core EPS. Our GAAP reported earnings were $32.8 million or $0.25 per share for the fourth quarter. This was a clean quarter as non-core items were limited to a small loss on the sale of securities and the ongoing amortization of noncompete agreements recorded in prior mergers. Our core earnings for the quarter were $33.5 million and diluted earnings per share were $0.26 which compares to $19.6 million or $0.23 a year earlier. Core net income increased approximately 71% and core diluted EPS increased 13% over the same quarter a year ago.
For the full year, our GAAP reported earnings were $66 million, $0.60 per share compared to $59 million or $0.70 per share for 2014. We had two significant adjustments between GAAP and core earnings which were the merger related items in the quarter in connection with the HVB acquisition and the pension plan termination. Excluding these items, core earnings were $105 million or $0.96 per share compared to $67 million or $0.79 per share in 2014. This represents growth of 58% and 22% respectively. Our tangible book value per share as of December 31 was $7.05 increasing 9% year-over-year.
Turning to slide six, let's take a look at our loans. We experienced strong growth across all of our commercial asset classes. Total portfolio loans were $7.9 billion which represented an annualized growth rate of 20% over the prior quarter. On an organic basis which excludes the loans acquired in the Hudson Valley transaction, we grew loans $1.3 billion or over 27% in 2015.
Turning to the next slide, our mix of business continues to be diverse across C&I, CRE, specialty finance and consumer asset classes. Over 39% of our total loan portfolio consists of C&I loans including our specialty finance business lines. We believe we're well positioned for a rising rate environment if it does occur as the majority of our specialty finance loans are short duration floating-rate assets.
Yield on loans was 4.65% and excluding the impact of purchase accounting accretion, the yield on loans was approximately 4.3% in the three months ended December 31.
Turning to our deposits on the next page, average total deposits were $8.8 billion for the quarter which represents a growth of 6% on an annualized basis compared to the linked quarter. Our average core deposits increased $123 million in the period which also represented an annualized growth rate of 6%. At the period end of December, deposits of $8.6 billion declined $225 million relative to the prior quarter end. This was mainly due to fluctuations in our municipal deposit. Municipal deposits reached their peak at the end of September in connection with tax collection season and then declined late in the fourth quarter.
Our deposit mix is attractive with close to 50% of our deposits consisting of demand accounts. At December 31, 91.2% of our deposits were core deposits and our cost of deposits was 26 basis points. Our loans to deposit ratio is just under 92%. We anticipate that long term we will match our loan to deposit growth more evenly as we create an efficient balance sheet targeting a loans to deposit ratio of approximately 95% over time.
On slide nine, let's look at our fee income. Excluding the impact of securities losses which were $121,000, total fee income was $16.2 million which represents a growth of 16% over the same quarter a year ago and represented 14.5% of total revenue. We have a diversified fee income mix as our fee-based specialty finance businesses are growing both organically and through acquisitions. For the year, accounts receivable and factoring commissions which includes our factoring and payroll finance businesses, grew by $2 million or 14% over 2014.
Our public finance sector team has also had success originating loans and deposits. As of December 31, 2015, their total loan balances were approximately $190 million with a robust and diverse pipeline of new opportunity. We anticipate this team will also become a fee income contributor in the first half of 2016 along with their new syndications and swaps and cash management teams and businesses.
On slide 10 you can see the progress we made this year in driving operational efficiencies. We achieved a 47.6% core efficiency ratio for the fourth quarter of 2015 which represents an improvement of 640 basis points over the same period a year ago. You can also see our continued improvement in driving core operating leverage. We grew revenue by 2% quarter over quarter and were able to decline our operating expenses by 90 basis points. Our current core noninterest expense base of $54 million equates to $216 million in total OpEx on an annualized basis.
We're maintaining our guidance on target operating expenses for 2016 of $220 million to $225 million. We have continued investing for future growth and in recent months have hired four new teams and added capabilities in several existing businesses. We're also investing in personnel systems and risk management infrastructure as we're now over $10 billion in assets. We remain committed to growing our revenues at least twice the rate that we grow our expenses.
Let's review asset quality on slide 11. Charge-offs against the allowance was $3 million or 15 basis points of average loans which compares to $1.7 million and 9 basis points of average loans in the linked quarter. The increase in charge-offs was mainly due to the resolution of two relationships in our equipment finance and CRE portfolios.
We continue to add to our allowance for loan losses and our provision expense was $5.5 million driven by the need to provide for organic loan growth as well as the Hudson Valley loans that are now part of our allowance calculation. The allowance of total loans and the allowance to NPLs were 64 basis points and 75%. Please remember that these ratios do not include the impact of the remaining fair value market of $42 million recorded in previous acquisitions.
There were no material changes in our taxi medallion exposures. One of these loans was classified as substandard during the quarter. We're working with our borrowers and closely monitoring collateral values, cash flows and the performance of each one of these loans. Jack.
Thanks, Luis. Let me summarize the quarter. We continue to have strong momentum in quarter earnings and profitability. Core quarterly earnings were up 71% over the same time last year and core annual earnings were up 58% over 2014. The core return on average assets was 122 basis points and core return on average tangible common equity is 14.6%.
Operating efficiency improved 610 basis points from last year to 47.6%. Commercial loans grew $334 million in the quarter. This represents an annualized growth of 20%. Average core deposits increased 6% in the quarter. Over 90% of total deposits are demand, savings and money market accounts. The total deposit base is approximately 80% commercial deposits. We have done a very good job in retaining the Hudson Valley deposit base. We're now really focused on growing the overall core deposits as we begin to leverage the balance sheet.
Fee income is 15% of total revenue. Our objective continues to be to improve the mix to 20% over the next several years. Costs continue to reflect the strong expense management process and our ability to reallocate cost to higher revenue opportunities. The run rate costs as Luis said, upon full integration excluding amortization of intangibles are in the $220 million to $225 million range.
At the end of the day, we're well-positioned to continue to improve profitability and drive growth. As we close the 2015 chapter of Sterling, I would really like to thank everyone who has been part of this strong performance, employees, clients, shareholders and advisors.
Now let's open the lines for questions.
[Operator Instructions]. Your first question comes from Casey Haire with Jefferies.
I wanted to start on the NIM outlook. Understanding that there was some drags from lower prepay penalty and lower collection income from Hudson Valley. Is this 430 run rate -- has [Technical Difficulty].
-- kind of a couple one-time items. We have a couple of very large 1031 exchange businesses that matured from a deposit standpoint towards the end of the year. So we're very comfortable that we will be able to grow deposits in a meaningful way to match the loan side of this thing. We have managed the balance sheet to lever the loan to deposit ratio up to that early 90% range. We have been very comfortable. We have retained the great customers that Hudson Valley acquisition brought us and we have the ability now to really leverage the good deposit base that we have to continue to grow.
I know you were targeting 95% by year-end. You made a huge step this quarter. Is 95%, are you going to stop there or would you go above that?
We may slightly above that but that's our target. 95% is really our target and our preference is to not ever go above 100%. So different things happen through the quarters and the months but that's -- 95% is our target.
Your next question comes from David Darst with Guggenheim Securities.
Luis, on the expenses, will we see a step up in the first quarter from the new hires that you had in December or is there an expected savings that will offset that?
You are going to see a slight increase but it's not going to be -- it's not like a new plateau is being reached. So you do have a continued investment on the hires that we've announced on that front but there are merger-related items and cost savings from the full integration that will offset partially. So you are not going to see a significant increase or a big jump in the first quarter. It will be more of a gradual increase over the course of the year as you continue to build out infrastructure and continue to hire teams and invest for growth.
Okay and so the $222 million to $225 million, that is your operating number excluding any intangible amortization. Is that right?
Okay. And then on the fee income, it sounds like you've got a couple things that are happening in the first quarter that ought to drive some fee income growth. But when we look at the factoring business year-over-year, what would you say is new earnings from the acquisitions that you've done and then has the legacy business run off or did you change that in a manner that you've really replaced it with new business?
So the new business, the majority of the growth when you look at full year and there's always seasonality from quarter to quarter and that's why in that business we always like to look at and compare year-over-year versus either linked quarter or quarter in between because remember that this is a business that generates every 30 days where you are discounting new receivables and so forth so there's always a little bit of seasonality in them and there might be fluctuations and peaks.
The majority of the growth between 2014 and 2015 was merger-related and we haven't really lost anything on the organic front but we have seen some margin compression in those businesses as well. So the increase -- the organic increase that we've had in volume has been essentially offset by margin compression as there's been new entrants into the market, there's both new banks as well as independent specialty finance companies that have jumped into this business as well. So it's a competitive environment.
The growth has been mostly M&A when you look at year-over-year but we haven't really -- the organic side of the house has attrited. It has just had pressure from a margin perspective that have been offset by new volume.
For the most part, the volumes in both payroll and factoring have been what we expected. The margin compression in both of those businesses is what we have experienced. So we're either trying to outrun it in the volume side or find better niches or higher profitable niches from a margin standpoint and those are the shifts in businesses that we're doing right now.
Okay, got it. And I guess Jack when you look at the New York market so many of your peers are growing through multi-family and real estate lending. You've chosen C&I. What types of institutions are your new hires bringing their books of business over from?
So we've tried to be very, very balanced in both growing CRE and C&I. So our particular belief is that the diversity of the balance sheet matters and it especially matters through different interest rates and different credit segments -- sectors. So we have tried to create a fairly good equivalency between current C&I and CRE and you can see from one of the slides about the growth organically in virtually each one of the categories. So we have tried to be smart about doing that.
So to answer the question about the teams, the teams are generally coming from the larger banks and the teams come from different levels of expertise. We have very strong execution capabilities on the commercial real estate side and obviously the market gives you lots of opportunities. So our predominance of hires are more on the C&I and frankly the deposit gathering side but they are coming from a lot of the larger institutions that have broad-based service and product set and frankly very strong professional expertise.
Your next question comes from Matt Kelley with Piper Jaffray.
Maybe just a little bit of follow-up, where are some of the new commercial real estate loan production yields that you are coming in, where are the yields coming in at for CRE?
Yes, so they are mostly coming in to the non-owner-occupied and owner-occupied facilities. So whether it's -- we have some office building, we have some centers, commercial centers. We have a good amount of owner-occupied meaning existing C&I clients that want to borrow around that. We do by the way, we do have a number of multi-family transactions but they are coming indirectly not through brokers. So the difference with us is we tend not to have deals coming in through brokers. We tend to have deals coming in through an existing client that we want to fuller relationship with. So between owner-occupied office/centers and multi-family relationship-oriented, that's where we're getting the growth in commercial real estate.
And the yields on that production?
The yields are going to be higher than the multi-family broker originated things. So they are going to be in the 350s to 4.25% range.
So it depends, Matt, it depends on product it depends on term but when you aggregate we do things at a five-year fixed-rate, seven year fixed-rate on aggregate for the fourth quarter CRE yields were slightly above 4%. So I think where you're going from a NIM am perspective, the book of business that is rolling off continues to be at a higher rate than the book of business that's being put on which is one of the things that pending to further rate hikes will continue to have. There will be a little bit of downward pressure on NIM from that perspective.
And then in some of your national type of lending portfolios, specialty lending segments, can you size up for us any exposure to the energy commodity industrial kind of complex that is in the crosshairs? And any way to give us a sense of how much aggregate exposure you have in some of those lending segments and then what are your thoughts on provisioning expenses going forward?
From an oil gas energy perspective, Matt, it is all -- it is a very small exposure that's concentrated in our equipment finance business. It is less than $15 million today. So that is not -- the areas of the economy that are showing stress are not places where any of those businesses are really any of our specialty lending businesses are really exposed to so we're not that -- we do not see that as a concern that should impact us this year.
And the provision?
Sorry, Matt, what was the second question?
Just thoughts on provisions relative to within $5 million, $5.5 million the last two quarters, about the same level or--?
About the same level for the next couple quarters and then as the accretable yield starts rolling off in the second half of 2016, you should see a corresponding decrease in provisioning levels.
Okay. Then last question, on your comments on the quarter to quarter period end flows on deposits, you had mentioned you had some 1031 exchange business had matured. Is there any read through there to just slowdown in the volume of commercial real estate multi-family type transactions that those real estate organizations are involved with?
I'm sorry, I'm not sure I'm following you on the question, Matt.
Just the balances of deposits, the 1031 exchange industry maintains at your bank. Was there a larger outflow than you anticipated there that could be just related to any type of slowdown in volume of transactions in their business lines?
Got it. No, actually in this particular case, we had a significant amount that just matured during that period of time. There's still a significant amount of activity in the markets and the corresponding deposit. Frankly, one of the things we're trying to do is smooth out that sector so we have at any one time, we have several hundred million dollars' worth of 1031 exchange money. Instead of having ups and downs, we're trying to smooth this out and frankly manage it and we didn't particularly do a great job of managing it this quarter. So are trying to smooth out. It is not reflective of slowdowns of people doing transactions. It's more reflective of just the nature of the types of clients we have.
Your next question comes from Collyn Gilbert with KBW.
Just to tie back to your last comment, Jack, that there's still a significant amount of activity that you are seeing in the market, can you just correlate that to what you think the loan growth expectations would be for 2016?
Yes, so we continue to believe that we can originate mid-teen commercial loan growth. So to be specific about it, it is commercial loan growth and we do believe that it is balanced across C&I and CRE. Again, one of the attributes of the balance sheet as you know is we've really created optionality in the balance sheet to grow different sectors when they provide better yields and credit metrics and frankly to say no to areas that do not. So we do believe mid-teen types of commercial loan growth.
And then, Luis, just back to the comments around the NIM and the balance sheet mix shift, I guess I was thinking that there would be -- the ability to absorb the liquidity would occur more in the year than it all happening this quarter. I mean securities grew this quarter. Was there some sort of strategic change in the way you were thinking about managing that excess liquidity or maybe you could just sort of talk through that a little bit.
No, I don't think there was a major change in anything from a strategy perspective or a balance sheet management perspective. I think that we have been -- the growth in securities for the quarter is just being optimistic and taking advantage of where we see relative value and where we're presented opportunities to invest. I think you're going to see us materially changing the composition of the investment portfolio over time to be a little bit less focused on corporate bonds and being a little bit more focused on MBS and [indiscernible] which we think over time is going to lead to a better risk return trade-off and position the balance sheet a little bit better.
But the usage of the -- I think that the NIM and -- again in a world in which we grew loans at an average basis and a period end basis by $250 million and there's -- and the origination yields continue to be below where the existing book of business is, you're going to see a little bit of that margin compression but fortunately that gap between the existing yield and the yields coming on is kind of getting narrower and narrower. So I do see light at the end of the tunnel from that perspective.
What I do want to make sure folks that we make clear is that we're taking a conservative approach because we don't know what's going to happen from a rate perspective with the recent uncertainty. So I think we're very well positioned for a rising rate environment as there's two more rate hikes over the course of the year. I think that we have a diverse set of businesses that are going to be big beneficiaries of something like that but the ability to grow NIM and to expand it, it can't only be mix shift it does have to be aided with some -- the mix shift discussion has a finite feel to it. Eventually it does have to be -- the new origination yields have to contribute to that. It just can't be mix shift and I want to make sure that we explained that clearly and that we're taking a conservative approach.
I would probably add to what Luis said just from a macro standpoint, so we're managing to certain types of returns and certain types of outcomes relative to earnings and earnings per share. There are lots of levers that we pull along the way. So for the quarter we saw opportunities to lever the balance sheet even more. We're constantly looking at our expense base for example and looking at expenses that are less productive or have a lower per margin associated with the allocation of those expenses and trying to reallocate those [Technical Difficulty] to higher levels.
So the simple example that you all know is what we're doing with the consolidation of the branches and [Technical Difficulty] commercial side of it but we're doing that throughout the Company and again, the net result of that, whether it is NIM, balance sheet growth, yields, provision, all that is we're trying to manage to the expectation of delivering consistently strong returns and earnings and earnings growth.
And then just one final question, Jack, maybe could you just talk a little bit about your appetite for [Technical Difficulty].
-- has gotten a little bit out there but we continue to look at two pieces -- so one on the commercial finance side of it where we could have something that is incrementally accretable in businesses we're generally in today so we can get more efficient and effective in the commercial finance world. We look at two or three deals every month and we've said no to an awful lot of them because they either don't have the credit levels that we're interested in or the prices are not right.
On the bank side of it, there's only really a small list of folks that would make sense on our side and we look at a couple criteria. One, the banks would have to be deposit heavy, not asset happy. So they'd have to be the types of deposits that frankly HVB products brought us.
Secondly, they'd have to be more commercially focused than kind of retail focused. We can go in and consolidate lots of branches but if a bank has a predominant 90% retail environment, it probably doesn't make sense.
And then third, we would look at anything that would allow us to create incrementally more positive operating leverage. So where we go in and we increase productivity or create more efficiencies and I guess our teams that came from Hudson Valley as an example, this last deal, they've been significantly incrementally more productive in this environment because they have a broader product set to deal with their clients. So very proud of the team that we've brought on from Hudson Valley. And we've been effective about creating the efficiencies and the economies of scale in terms of taking cost out of this.
So one way to answer your question and by the way, some of the deals that have been announced probably go farther than what we would go in terms of book value dilution and things like that. Even though we more look at earnings accretion, the book value dilution in some of these things would be greater than what we would expect.
Your next question comes from Casey Haire with Jefferies.
Just wanted to touch on the tax rate. 34% expected this year. I think you guys had said 36% last year. Is that good for next year as well? I know you had that REIT benefit lapse. I'm just trying to get a good look going forward.
For 2016 and 2017, yes 34% is a good number.
There are no further questions.
Thanks for your time, everybody. Have a great day.
That does conclude today's conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!